Wednesday, June 03, 2009
MBA mortgage apps: Surprising no one, they are declining as mortgage rates increase. Purchase apps are still up a bit, but refi apps are falling off sharply. Refis are an important source of income for banks.
The home sales situation around the nation varies hugely right now. If prices were quite high in an area, and if ownership rates were below 63%, there is real buying interest. In some areas, prices have not yet fallen that much, and ownership rates were too high to have seen a jump. Overall, there is a massive slew of hidden inventory, as well as an incoming wave Alt-A and economically-spawned foreclosures and forced sales. Recovery will surely not come nationally until after 2010.
Commercial RE: Building is going to slide throughout the year and probably through next year. See Calculated Risk for analysis, but this will be a continuing drag for the economy for over a year more. My guess is that in some areas CRE will be dead for another 3 years. Commercial mortgages, on the other hand, are blossoming with nuclear mushroom clouds. CM losses will keep rising for over a year.
ISM Services: This is a negative surprise that does not square with manufacturing. The headline number is that it increased from 43.7 to 44.0, but the underlying details are more negative than last month's report. Inventory sentiment was unchanged at 62.5% (too high). Inventories were reported declining more slowly. Backlog of orders dropped from 44 to 40. New export orders dropped from 48.5 to 47. New orders dropped from 47 to 44.4. Employment is still declining, and although the pace is reported as slowing, at 39 it is declining pretty heftily.
I don't think most sober analysts would see this as an improvement over last month, which suggests yet another drawback in the Congressional proposals to raise taxes on liquor. Since most confidence surveys are rising not on the basis of current conditions, but on the basis of hopes for the future, Congress really needs drunken, cheerful analysts to keep talk of green shoots alive. Perhaps the next installment of the Economic Recovery Act could include a proposal to hand out free liquor to economic analysts. (Full disclosure: I am as close as you can get to a teetotaller as you can get without actually never drinking, so I am not talking my book here.)
ADP employment survey (pdf): The headline number of 532,000 showed a slight decrease in job losses, but that was only because the March/April number was revised up some 54,000 from 491,000 to a decline of 545,000. Not even the drunken analysts took this as being a good omen, because it is likely this one too will be revised upward. More worrisome, small business job losses are cranking right along.
Preliminary manufacturers shipments and inventories remained in the "still sagging" range. Shipments of manufactured non-durables are declining still. The inventories/shipments ratio is only down to 1.45 from March's 1.46. That suggests quite a few more months of catch-up and overall contraction. Revisions from advance were generally negative.
NACM Credit Manager's Index: Because this is business-to-business credit, it should show a decisive pop when things start breaking loose. I looked at this report very carefully, after reading some positive commentary at the beginning. I was disappointed by the underlying details. The last two months have shown improvement from the nuclear winter numbers of January, February and March, but levels of new credit and new apps are not at the point at which they would justify talk of stabilization. For manufacturing, the index of unfavorable factors has remained steady for three months, and the index of favorable factors has remained steady for two months.
Services, on the other hand, did show the healthy pop in new apps and amount of credit extended that I look for each month. However, given that services follow manufacturing, this seems to be attributable to the earlier pickup in manufacturing which appeared to have stalled out in this report. So unless manufacturing can pick up again, services is unlikely to keep showing this favorable trend, and will just stabilize at a slower rate of decline to match manufacturing. Both service and manufacturing overall indices remain in the contracting levels. I am somewhat discounting the overall levels because the need for credit in relationship to economic activity should have decreased due to falling prices. According to this report, we are doomed to a slack summer through August.
Crude oil: Today's inventory report continues the unrelieved string of slack and slowly worsening demand. The four-week average of crude imported. is still about 9 million barrels a day. That is about 693 thousand barrels a day below last year. Total stocks, excluding SPR, are at 13.8% above last year's levels. Crude stocks are 20.3% above last year's levels. A quote:
Total products supplied over the last four-week period has averaged 18.2 millionDiesel demand has increased, and my bet is that is increasing due to higher stocking levels of businesses and households for heating purposes. Trucking may be picking up too (we certainly hope so!), which would be a positive. Crude has fallen sharply today. In the last week, it was reported that OPEC was pumping more, and real consumption figures of oil do not support much in the way of higher prices. So far this year, a YoY comparison shows product supplied down 6%. Since there are no real shortages anywhere (for example, diesel stocks are up 33.8% over last year's), the speculative part of this run doesn't have much oomph behind it. That doesn't mean it won't continue.
barrels per day, down by 7.7 percent compared to the similar period last year.
Over the last four weeks, motor gasoline demand has averaged about 9.2 million
barrels per day, down by 0.4 percent from the same period last year. Distillate
fuel demand has averaged about 3.6 million barrels per day over the last four
weeks, down by 8.8 percent from the same period last year. Jet fuel demand is
11.7 percent lower over the last four weeks compared to the same four-week
period last year.
I think the decline of crude is related to negative comments about the Euro from some analysts, OPEC figures, and China's somewhat dour comments about its economic prospects. See this Bloomberg article on China's comments:
China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump.That pretty much knocks the slats out from any theory that China will be taking up the slack in oil demand from Europe and the US. I do not necessarily think that the run up in oil is over, though. The reason why is contained in the mutterings of anxious US investors over choices the current administration has recently made with regard to corporate debt holders. The fear of being wiped out by the government in other investments may well be overweighing the weak demand/supply situation. If you are wrong 25%, that's better than the risk of being wiped out 50% by an activist government with a deficit of common sense:
The foundations for an economic recovery aren’t solid, the State Council said in a statement on a government Web site today. Trade faces “unprecedented difficulties,” Vice Commerce Minister Zhong Shan said separately.
The government’s approach to the bankruptcies of General Motors Corp. and Chrysler LLC illustrates how this new, unstated policy works: Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group.The obvious answer is "yes".
The big threat is that this policy will extend to all bonds, including Treasury and municipal debt, not just corporate obligations.
Einhorn raised the question of just how far the administration would go in pursuing this new policy, especially if the interests of bondholders again came into conflict with politically favored groups.
“When teachers and firefighters are losing jobs and benefits, will municipal bondholders be asked to share in the collective sacrifice?” he asked. “Might the shared-sacrifice theory eventually extend into the U.S. Treasury market during a crisis?”
Thus, crude oil at these prices may be a very risky investment, but it does contain the theoretical chance of much better returns than on "safe" investments, and it may well contain less risk. This is the danger you create when you let the government pick winners and losers - you make it difficult to calculate risk, and thus drive speculation in untested and unknowable markets. Few investors with substantial funds won't be worrying over the questions raised by 5 months of this administration's (including Congress!) financial activities. This started last year with the nationalization of Fannie and Freddie in order to stuff them with bad debt from the banks and investment houses, but this year's deeds (including legislative clauses to abrogate protections in bond servicing agreements) have added a new level of risk to all such obligations.
Update: Regarding the threat to investors, CA serves once again as the leading edge of the next trend. See Rob Dawg's post on the recent moves in the CA legislature regarding municipal bankruptcies and unions.
Well there's an unsustainable business plan if I ever heard one.
One of the reasons that all those "innovative" mortgage types existed was that they encouraged constant refis.
Whenever you shove down mortgage rates like this, you generate a wave of refis. Rate and term refis, not cash-out refis necessarily.
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